Steering The Boat

This note was originally published at 8am on February 24, 2015 for Hedgeye subscribers.

“My only plan is to keep coming to work…”

-Henry Singleton


I had a lot of encouraging feedback about the book I cited yesterday, The Outsiders, where William Thorndike analyzes the best practices and processes of some of the best CEOs in US history.


Henry Singleton, of Teledyne fame, tops the list and had some fantastic day-to-day leadership advice as a follow-on to the aforementioned quote:


“... I like to steer the boat each day rather than plan ahead way into the future… I know a lot of people have a lot of strong and definite plans that they’ve worked out… but we’re subject to a tremendous number of outside influences and the vast majority of them cannot be predicted. So my idea is to stay flexible.” (pg 53)


If only our un-elected-central-planners of everything from markets to economic gravity embraced that risk management #process and humility…


Back to the Global Macro Grind


#Flexibility and “data dependence” be damned. Today our almighty overlordess of market expectations (not to be confused with economic realities), Janet Yellen, will predict the parting of the heavens and the smoothing of the seas.

Steering The Boat - Fed cartoon 02.23.2015

Since Mr. Macro Market tends to front-run inside information fairly efficiently, it will be interesting to see if yesterday’s move (lower) in US interest rates will get a love-tap from the Janet’s testimony.


But be careful not to mistake the “rates” trade with the US Dollar #Deflation one. I’ve been on the road telling investors from CA to MA in the last week that while these are not mutually exclusive macro moves, they are moving on different catalysts.


Here’s what that looked like yesterday:


A)     #StrongDollar (+0.5% on the day) > Oil Down -2.8% > CRB Index -1.2% > Energy Stocks (XOP) -0.9%

B)      #RatesDown (10yr -5bps intraday) > Long Bond (TLT) +0.9% > REITS (VNQ) +0.7% > Healthcare (XLV) +0.7%


Healthcare stocks (XLV) have positive quarter-over-quarter performance (returns) in both USD up/down and Rates up/down scenarios (we call those macro environments Quad1 and Quad4), so that’s the easiest S&P Sector to be long (you win both ways).


What’s not easy is being long Energy stocks when the USD ramps and/or REITS when Long-term Rates ramp (i.e. neither work). So this puts a lot of pressure on immediate-term monthly performance chasers as neither A) nor B) are cooperating week-to-week!


Another obvious observation here is how A) and B) are linked on the intermediate-term TREND duration:


  1. USD up + Rates Down > Global #Deflation… and
  2. #Deflation > Junk Debt Risk > Emerging Market Risk > Corporate Earnings Risk


But, have no fear, the San Francisco Fed’s John Williams is here! Being a lifer at the Federal Reserve is not a compliment. John has been there since 1994 and, alongside Janet, missed some large predictions about risk (2000, 2008, to name a few) along the way.


Not to be confused with one of the best American composer’s in US history (The John Williams of Jaws, ET, Star Wars, etc. film score fame), this Williams is more like Brian – a storyteller, but with less NBC Nightly pizzazz.


In assessing the US economy yesterday, Williams said two things in particular that caught my attention:


  1. Employment – he called the jobs market “remarkable” (as in booming, strong, etc.)
  2. Oil – he called the recent #Deflation “transitory” (as in oil is going higher, not lower)


Yes, in case you didn’t know – now you know. Some of the worst forecasters in our profession now have forecasts for everything.


Notwithstanding simple things like long-term mean reversions, price history (Oil averaged sub $20/barrel during both the 1983-1989 and 1993-1999 real US economic demand booms), etc., this storytelling from Fed heads is becoming a massive risk to the economy.


Why? Well, let’s start with where Henry Singleton would… and ask ourselves what is the risk that A) Williams is wrong (Oil remains #deflated, and jobs are at a late-cycle peak) and B) Yellen makes a policy mistake based on these Williams’ forecasts?


I don’t have answers to how all of this plays out. But I do have advice: keep both hands on the wheel and life preservers in the boat.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.85-2.16%

SPX 2066-2123
USD 93.79-95.36
Oil (WTI) 48.42-51.26
Gold 1185-1215
Copper 2.52-2.61


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Steering The Boat - 02.24.15 chart

March 10, 2015

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Cartoon of the Day: Strong Dollar!

Cartoon of the Day: Strong Dollar! - Dollar cartoon 03.09.2015

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